The Dos Bocas Debate

 

At the 5thAnnual Mexico Gas Summit in San Antonio, I was honored to be included on a panel tasked with discussing the Commercialization and Trading of Fuel Products in Mexico. The conversation revolved around the inherit challenges of the Mexico market including contract terms, foreign exchange rates, hedging, credit risk, and operational issues. For me, the most interesting question posed by our moderator and industry thought leader, Rajan Vig, was his final question – “Will the Dos Bocas refinery get built?” Panelists were split among the yays and nays, but to take it a step further, let’s dig into the merits and downsides of the project itself. Get the latest right here.

 

OPTION ONE: Build Dos Bocas as Planned

The Dos Bocas refinery has proven to be a polarizing project. Despite the controversy, there are indisputable reasons the project makes sense and would be a positive addition to the struggling energy infrastructure in Mexico. The refinery would:

  1. Add to supply in a short market
  2. Compensate for thestruggles of the existing six Pemex refineries
  3. Support the local Tabasco job market both in construction and operationally
  4. Build national pride…Viva la Mexico!

 

Of course, there are reasons new refineries aren’t being built in the U.S. (or really anywhere outside of China). Adding 340,000 barrels of daily refining capacity comes at a cost. Pemex would be faced with:

  1. A project with a budget and time frame that three leading EPC firms marked as unattainable
  2. Adding at least $8 billion of debt to an already maxed out balance sheet (likely more)
  3. At least three years of construction before delivering any new supply (best case scenario)
  4. Remaining reliant on foreign suppliers (U.S.) for a large percentage of refined products even after completion

 

OPTION TWO: Downsize the Project to a Smaller / Modular Facility

One of the potential outcomes proposed on the panel was for Pemex to do Dos Bocas but downsize the project from a full blown 340,000 bpd refinery to a smaller scale, modular, or topping unit. The general theory would be to run crude through the unit, take one cut of lighter products (gasoline, diesel, and jet fuel) out of the stream and sell the remaining liquids to be further refined or processed by a more complex, heavier refining unit. I haven’t seen this discussed in any formal manner, but I can see where meeting in the middle could be the end result. On the positive front, a topping unit would:

  1. Be substantially less capital and thus easier on the balance sheet
  2. Require fewer permits and technical construction
  3. Become operational much quicker
  4. Produce a specific yield of high-demand products while creating a new revenue stream with selling off the remaining liquids
  5. Fulfill the spirit of campaign promise created by President Lopez Obrador

 

The downside to settling for the smaller facility option would include:

  1. Much lower volumes of refined products produced
  2. Still years away from generating refined products
  3. Less local employment benefit for construction and facility operations
  4. Little impact on the current reliance of foreign suppliers to balance the market

 

OPTION THREE (my opinion): Stop this Nonsense – Pencils Down

I acknowledge the fundamental need for more refining capacity in Mexico. Heck, the country could use a shiny, brand new million barrel a day unit. However; multi-billion dollar projects are not built on “need.” They are built on cash flows, returns on capital employed, and highly complex financial models. Well, at least in most of the world, that’s how things get built. Even with a positive economic model, the Dos Bocas refinery needs to be compared to the potential benefit of other internal projects like drilling for new crude production or adding much-needed pipelines and terminals. 

The rating agencies have vocalized their opposition to this use of capital, the press has questioned the logic of Dos Bocas, and the construction firms have affirmed the nonfeasible nature of the budget and timing. On the panel, I couldn’t resist, and vocalized my skepticism that anything ever gets built at the Tabasco site. It just doesn’t make sense.

But this is not the United States, and Pemex does not have shareholders to hold them accountable. One could argue that Mexico finds itself in financial straits based on a long history of decisions made by self-serving politicians.  President Lopez Obrador ran on a campaign of nationalistic pride and pride is a powerful/dangerous emotion. Therefore, I can’t totally rule out the possibility that despite all the red flags, all the naysayers, and all the logical and sound reasons, Dos Bocas will get built and AMLO will have his monument.

One day, I’ll make the venture south and see if I’m standing in front of Dos Bocas, half a Boca, or No Boca.

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Best,

Chad Smith
Senior Vice President of Terminal Services